Right to remain: what will happen to your money if we stay in the European Union?

Will you be better off if the UK votes to stick with our continental friends? That’s certainly what the Remain camp argues: it says the effects of leaving the European Union would be very serious for people’s household finances – partly because they would have reduced wealth at their disposal, but also because of a hit from higher prices, more expensive mortgages and lower returns on savings and investments.

The Remain camp’s central claim is that every household would be £4,300 a year worse off by 2030 as a result of leaving the European Union. This figure is based on a Treasury analysis that looked at how the UK’s gross domestic product – in effect, the value of our economy - would be affected by a Brexit.

So will you really have to tighten your belt to the tune of £4,300 a year? Well, no. The first point to make is that the Treasury isn’t even suggesting this is how much you’ll lose – rather, it’s saying that as the post-Brexit economy would grow less strongly than it would otherwise, each household would be £4,300 worse off than if the UK stayed in the EU.

Also, GDP isn’t quite the same thing as household wealth – in fact, it’s quite a poor proxy for how people fare during economic ups and downs. Even if the Treasury figures on GDP are spot-on, the effect on average households may be quite different.

Finally, while the Treasury’s sums add up, there’s plenty of dispute about what went into them in the first place. For example, they are based on some very pessimistic forecasts about what will happen to investment into the UK from overseas if we leave the European Union.

The truth is that while most economic assessments have concluded households would probably lose out following a Brexit – that’s the conclusion of everyone from the Institute of Fiscal Studies to the International Monetary Fund – the Treasury’s figures are too precise to rely on.

The Remain camp argues that taxes would have to go up following a Brexit, hitting people’s disposable incomes. It has suggested the long-term cost will be the equivalent of about 8p in the pound, while last week the Chancellor George Osborne warned there could be an emergency Budget following an Out vote, at which income taxes might rise by 2p on the basic rate and 3p on the higher rate.

These numbers are based on the same Treasury forecasts about the size of the UK economy in the years following a Brexit. If the economy shrinks, so will tax receipts, leaving a black hole in Government finances that would have to be filled with new taxes or lower spending. So if you believe the warnings about the economy, you should take the prospect of tax rises seriously – though inevitably the Government would have to make political choices about how people share the burden.

The Treasury’s forecast for house prices in the event of a Brexit is that they would fall by between 10 and 18 per cent by 2018. The Remain camp warns that this would raise the spectre of negative equity for some mortgage borrowers, as well as damaging the economy because people would feel worse off.

In truth, however, those numbers look high in the short term. The biggest effect on house prices from a Brexit would come from a fall in net immigration, assuming that’s what actually happens in the years following an Out vote. But while reduced demand would ease the pressure on housing, the market is currently so far out of kilter that it will take many years to balance out. Many housing experts think prices will continue to rise, albeit at a more modest pace, even after a Brexit.

The Remain camp has claimed that the average mortgage would cost £1,000 a year extra following a vote for the UK to leave the EU. This claim largely rests on the theory that the value of the pound will fall sharply following an Out vote, forcing the Bank of England to raise interest rates in order to defend sterling.

There’s no disputing that almost all economists think the pound will fall following a vote for Brexit – it has already fallen sharply this year as the likelihood of an Out vote has increased. However, the economic consensus is that the pound would have to fall by at least 30 per cent for the Bank to feel that the benefit of an interest rate rise for the pound would be greater than the damage to the economy that raising the cost of borrowing would do.

Such a sizeable fall is at the extreme end of probabilities according to forecasters. For example, Goldman Sachs, one of the gloomiest analysts on this issue, has suggested 20 per cent might be more realistic.

You might think, given that the Remain camp says a Brexit would force up interest rates, that it is at least optimistic about the prospects for savers in this scenario. After all, with interest rates now held at an historic low for more than six years, people with cash in the bank or building society have had a torrid time.

However, the Remain camp warns that rising inflation following a Brexit would more than wipe out the gains from higher interest rates, by eroding the value of people’s money – it points to Treasury analysis suggesting inflation would be 2.3 percentage points higher, a year after a vote to leave, than if the UK remains in the EU.

Testing such claims is very difficult – the Bank of England itself has repeatedly got its inflation and interest rate forecasts wrong in recent years. It’s possible, for example, that the Bank might even cut interest rates if it thinks a Brexit vote is doing sufficient damage to the economy.

As for investments, analysts are divided. In the short term, the shock of a Brexit would be likely to hit share prices, though maybe not to the extent that the Remain camp has forecast. UBS Wealth Management has suggested the stock market could fall by 10 per cent over the next 12 months, while the Treasury is forecasting a dip of up to 29 per cent by 2018 in the event of a Brexit.

Against that, investing in the stock market is a long-term pursuit. And Neil Woodford, probably the UK’s best-known fund manager, reckons the effects of a Brexit would be negligible over time.

If you accept the idea that a Brexit would be ruinous for the UK economy, the companies trading within it are likely to fare worse, which will depress their share prices. Still, large companies in particular are exposed to the global economy, rather than only Britain.

The Remain camp says leaving the EU would wipe £32,000 off the average pensioner’s wealth, largely because of the stock market falls it is predicting. It says pension incomes will be worth less as inflation rises and that people will earn less income on their investments.

Leaving aside the debate over the stock market, those claims look speculative. State pensions are protected by law and must rise by at least 2.5 per cent a year, protecting them from inflation up to at least this level. And people retiring over the next couple of years could earn more income on their pension funds if annuity rates rise in line with rising interest rates.

The Remain camp has claimed food bills would rise by an average of £220 a year if Britain exits the EU – chiefly because imported food would be more expensive as a result of a fall in the value of the pound.

That’s possible, but the picture is complicated by the debate over what happens to import tariffs – it’s possible Britain could make savings by cutting tariffs on food imported from the rest of the world once it is no longer bound by EU trade agreements. And EU responsibilities such as the Common Agricultural Policy carry a cost too.

The probable reality is that some foods would be more expensive while others would come down in price, but it’s difficult to be precise with forecasts, since these depend on how far the pound falls and, crucially, what deals the UK does on trade.

Similarly, the picture is cloudy on VAT, the main tax on spending. The Remain camp suggests claims the UK could cut VAT on energy bills, once it is outside the EU, are fanciful because this would not be affordable. It also argues that the EU is now handing back more freedom on VAT policy to individual member states.